Edge Advise

The Simple Math That Will Prevent Corporate Dentistry From Taking Over

In an unprecedented 3 podcast run Dr. Scott Leune made the case that corporate dentistry is coming to take everyone out. No one will argue that we’ve seen more and more corporate groups pop up, but it’s really simple math that will prevent them from taking over unless Dentists simply wave the white flag.

This math relates to Dentist Compensation.

Let’s say you are a dentist that can produce $50,000 of collectible production every month or $600,000 per year. You are faced with the following compensation scenarios:

  • You could work as an associate and make about $180,000 per year on the high end ($600,000 of collections at 30% compensation rate) and chances are you will make less than that.
  • You could own a practice and make $340,000 per year. Assuming a 20 year career as an owner that’s a difference of $3,200,000.

Where do I get $340,000 from? If you are collecting $600,000 as a dentist it is very likely you will have a hygiene department that is chipping in $250,000 of additional collections. If we then assume an overhead rate of 60%, which mirrors our average client, the Dentist is left with $340,000 per year.

Sure there will be some headaches associated with owning a business, but there’s headaches with being an associate dentist. I look at my career and don’t think I have any more stress owning my own firm versus being a manager at a large CPA firm.

So for corporate dentistry to take over it will take Dentists willing to work at a steep discount. I don’t see that happening.

Some other observations on Dr. Leune’s points:

  • He talked about practice values being at an all time high right now and I think he’s right on that point. The cost of capital is low and the demographics still show more buyers than sellers right now. With low interest rates Venture Capital has come into the business looking for bigger returns and banks are offering 100% financing to dentists to go out and buy practices. Will this go on forever? Unlikely.
  • He talked about the danger of corporates moving into your backyard and crushing you. We simply have not seen that to be true. In fact, a corporate moving next to a private usually spurs an increase in the production of the private? Why? My opinion is some corporates are overly assertive in diagnosis, some utilize bait and switch tactics, and many patients aren’t keen on seeing a new dentist every time they walk into the office. So the corporate spends a bunch of money to bring people into the practice and it ends up highlighting that your practice is right next door.
  • What was interesting to me is it seemed like Dr. Leune talked a bit out of both sides of his mouth. On the one hand corporate is coming to end private dentistry, but on the other hand he’s had start-ups using his methods that were collecting $85,000 in the 12th month of their existence.

This led me to think about a few things:

  1. There must still be a pretty big appetite for private dentists
  2. Why are these corporate groups going out and buying practices at 4 to 5 times EBITDA when they’d be better off just doing De Novos and utilizing Dr. Leune’s systems.

Given the demographic crush that is coming from the impending retirements of the baby boom all industries are going to face some consolidation and some rise in corporate groups. However, there will still be a place, and a profitable place at the table for private businesses. Dentists will just need to decide if they want to be there.